House Prices Drop, But Confidence Rises
This is a busy week for economic reports, so I need to make quick reference to today’s news, which was mixed.
House prices, as measured by the Case-Shiller index, dropped by 0.2% in November and the October number was revised down to show a slight fall also. Obviously this is not very good news and supports my point of yesterday that the real estate market remains very weak. Home prices have now fallen by about 35% from the stupid excesses of 2005 through 2007, with about 8% of that decline coming in the last twelve months. Given the state of the economy and the lack of income growth I don’t see any source of strength sufficient to push prices up much, if at all. On the contrary the prospect for further slow drift downwards is far greater than that for a resurgence.
This drop in home prices is, of course, a major factor behind consumer retrenchment. It is the reversal of the famous ‘wealth effect’ that people like Alan Greenspan were so proud of trumpeting back a decade ago. As prices fall households feel a psychological squeeze on their wealth. They compensate for this by augmenting their savings in other assets. The net effect being that consumption in the economy overall declines and we fall into a classic Keynsian paradox of thrift. Less spending begets the conditions for income declines which begets debt reduction and so on. Aggregate demand, which is the component of the economy so lacking at the moment, suffers in such a cycle. The unwinding of the real estate bubble is compounding the difficulties we face as we try to end the spiral down and re-start growth. Today’s data shows us that the slip down is still with us albeit at a much slower rate of decline.
The only conclusion I can come to is that housing will stay soft for months to come if not years.
The good news today was that consumer confidence ticked up slightly to 55.9 in January from December’s 53.6. That makes three months in a row of increase and gets us back to the levels of late 2008. In itself this means very little unless increasing confidence is translated into something of substance like extra spending. The key point to make with all these surveys is the trend: as long as confidence is on an upward path we should see consumption spring back to life. When that will be is, however, anyone’s guess. The correlation between confidence and spending is fairly loose at the best of times, and now, with so many cross currents in the data, it is especially difficult to tell what rising confidence implies for the real economy.
Having said that, one of our major impediments to getting a solid recovery going is the constant fear that consumers have about their welfare. To the extent that statistics like the consumer confidence index can guide us we are moving away from the depths and towards a more ebullient tone. This augurs well for sales in the spring and summer. If businesses read the data in such a manner then they will have to revise their sales forecast upwards and thus re-tool and re-hire to meet that prospective increase in demand.
It is this latter change we are all waiting for: business expectations need to get out of the doldrums before we can expect, with a sense of reliability, any sea-change in the employment outlook. That, clearly, is the holy grail of economic policy right now. Perhaps today’s consumer confidence data is a first step in that quest.
